RBI May Reduce Repo Rate to 5% in 2025-26. Easing Inflation and Increased Liquidity May Lead to Interest Rate Relief. Deposit Rates Will Be Affected.
RBI Update: The Reserve Bank of India (RBI) is preparing for a significant reduction in policy rates during the next fiscal year, 2025-26. Experts believe a total reduction of 1.25% to 1.5% (125-150 basis points) in the repo rate is possible. This will directly impact the common man's finances, home loan EMIs, fixed deposits (FDs), and bank interest rates.
Sharp Repo Rate Decline Possible
The RBI has already reduced the repo rate by 0.5% in two installments in February and April 2025. It is now anticipated that a further reduction of 75 basis points could occur in June and August 2025. Additionally, there is a possibility of another 0.5% reduction between October 2025 and March 2026.
If this happens, the repo rate could reach 5% to 5.25% by March 2026, which would be below the RBI's estimated neutral rate of 5.65%. This means banks will receive funds at a lower cost, potentially leading to cheaper loans.
Easing Inflation Opens the Way
In March 2025, the CPI-based inflation rate was only 3.34%—the lowest level in 67 months. It is expected to remain below 3% during April-June 2025.
If food prices remain stable, the average inflation rate in FY26 could be limited to 3.7%-3.8%. Low inflation gives the RBI ample room to reduce interest rates.
Impact on Deposit Rates, Possible Decline in FD Returns
A side effect of a lower repo rate is increased pressure on bank deposit rates. Several banks have already indicated that interest on FDs and savings accounts may decrease. A reduction of up to 1% in deposit rates is anticipated.
However, the advantage of lower interest rates will be cheaper loans and increased market demand. This will enable banks to disburse more loans, but their Net Interest Margin (NIM), or profit, may be under pressure.
Open Market Operations and Government Dividends
The RBI has planned open market operations (OMO) of approximately ₹2.45 lakh crore in April-May 2025. The aim is to increase liquidity in the system so that the impact of interest rate cuts is felt on the ground.
Furthermore, the RBI may pay a dividend of ₹2.18 lakh crore to the central government for FY25. This amount will help reduce the government's fiscal deficit and support development projects.
Dollar-Rupee Rate and Global Impact
According to an SBI report, the USD/INR rate in 2025 could remain between ₹85 and ₹87. Inflation is decreasing in the US, and the Federal Reserve may also adopt a softer stance. This could weaken the dollar and strengthen the rupee.
